Energy Finance

There are many of us in the energy industry who have been around (a loooong time) to see the ups-and-downs and ins-and-outs of this cyclical business. The incredible technology we use today may seem to young whippersnappers to be something that has always been.  Not so.

Thinking back to just the advancements in everday office machines, I feel 100 years old.

I remember being trained in high school to make multiple copies of a paper document. My classmates and I used a manual typerwriter to type on a sheet of soft plastic. The typerwriter keys made holes in the plastic sheet in the shape of letters. The sheet was then affixed to the drum of a mimeographic machine and we poured ink into the reservior. We placed a stack of paper next to the feeder and cranked a handle to pull paper under the drum, where ink bled through the holes in the sheet, leaving an imprint of words. To make several hundred copies, we cranked around the handle several hundred times. When only making one copy of a letter or memo, we placed a carbon-backed sheet between two sheets of paper and typed. Hence, carbon copy, or CC:

After high school, I worked as a full-charge bookkeeper at Southwestern Supply Co. I had cutting-edge technology, using one of the first accounting programs developed for use on a Radio Shack computer. There was no hard drive in the computer. The machine used two floppy disks, one containing a program for calculations and the other to store the data.

Later, I was hired to create a technical library for Compaq Computers.  I had access to an instant messaging system, called Vines, to communicate with other employees on our local area network. No email. No internet.

Much later, I installed computers in the offices of UOP catalyst sales executives and taught them to use their mouse by insisting they play Solitaire until they won a game. Then I trained them to use WordPerfect for documents and Framework for math. No Micrsoft Word. No Excel. I also convinced them not to affix their data disks to their steel file cabinets by using refrigerator magnets.

Guess my age? 

Petrodollars could amount to almost $1.3 trillion dollars in 2008, based on a year-to-date average oil price of $112 per barrel, says Calyon Securities CLSA’s head of China energy research, Gordon Kwan. A petrodollar is defined as a dollar’s worth of foreign exchange obtained by a petroleum-exporting country through sales abroad.

Petrodollars play an important role in greasing global markets, and have surged nearly tenfold, from $125 billion in 1998, as average oil prices increased from less than $13 per barrel to over $110.

In 2001, 27% of annual petrodollars were invested in U.S. equities and 16% went into U.S. bonds. During 2007, those numbers increased to 30% and 28%, respectively, says Kwan.  The higher percentage of petrodollar going into U.S. financial assets have  contributed to the long bull market in recent years, limited the rise in U.S. interest rates and recapitalized major banks. This could be a direct result of the oil exporting countries’ strategy to diversify their exposure away from their mostly oil-based economies.

While down significantly from recent highs, the overall U.S.  stock market and global economies have so far fared much better than in the previous two oil price shocks (down over 30%). Perhaps this is explained by the fact that oil expenditures are a much smaller part of global GDP than before.

For example, in the early 1980s, global oil expenditures amounted to over 6% of global GDP. But in 2007, it fell to 4%, although it could rise to over 6% again this year if oil prices continue to hover at current levels.

So maybe high oil prices might not be so evil after all?

Several Hart editors, including yours truly, recently attended a panel discussion regarding the future of oil. The event was held in Houston, televized on BBC World News, and the panel included our own Mayor Bill Whiite–who was brilliant, by the way. 

BBC World News America presenter Matt Frei chaired the debate, which examined questions such as…

How much longer can oil meet our energy needs? How urgent is the need to conserve what’s left? Can we count on business to provide future energy solutions or do governments need to intervene? What might the world look like if it moves away from its dependence on oil?

The panel included Amy Jaffe, senior fellow at the Baker Institute; Marvin E. Odum, president of Shell USA; Dominique Thormann, senior vice president of Nissan North America; Vijay Vaitheeswaran, author of Zoom: The global race to fuel the car of the future; and Bill White, mayor of Houston and former U.S. assistant secretary of energy. 

To watch the video, please click on: http://www.bbcworldnews.com/Pages/ProgrammeMultiFeature.aspx?id=196

Corn prices sank to a seven-week low today. Corn prices have fallen 20%, driven lower by ideal growing weather in the U.S. corn belt area and a drop in oil prices. 

Grain prices rose to record-highs, near $8 a bushel in June, as the worst flooding in 15 years ravaged the midwest. The return to warm, dry weather in recent weeks has reinvigorated crops, wiping out all the previous rally’s gains.

Some analysts now predict corn could produce a respectable yield of 150 bushels per acre, up from about 148 bushels per acre a few weeks ago.

The favorable outlook sent December corn prices down 20.25 cents to settle at $6.0825 a bushel on the Chicago Board of Trade, after earlier falling to $6.03, the lowest since May 29.

Other agriculture futures also turned lower. Soybeans for November delivery shed 45 cents to settle at $14.03 a bushel, while September wheat lost 13 cents to settle at $7.91 a bushel.

Lower corn prices mean consumers likely won’t suffer increasing sticker shock at the grocery store. Also, because livestock owners rely on corn to feed their animals, the price of everything from steak to eggs and pork chops should follow. Corn is also used in cereal and as as a sweetner in soda, candy and other food items.

The surprisingly large storage build of 104 billion cubic feet reported for the week ending July 11 suggests that electric utility gas consumption is lagging due to the economic slowdown, more normal weather patterns, and the impact of rising natural gas prices, says Michael Lewis, head of DB Global Markets Research, Bloomberg.  

But with Nymex gas futures prices now well under $12 per million Btu across the entire upcoming winter, some of that demand may be won back, says Jeb Armstrong, analyst for Calyon (USA) Securities. Yesterday’s triple-digit storage injection spooked the E&P sector, causing gas to sell off 8%.

“The worry is that the injection may mark a fundamental shift in the supply and demand of natural gas in the US. Fear has greatly compressed valuations as the market expects a larger and longer correction than we anticipate,” says Armstrong.

So, where is the floor? The front month gas contract has fallen over 20% since peaking on July 3. Yesterday alone the contract fell 8% after the EIA announced storage numbers.

Gas finally found support at the $10.50 million Btu level, but the worry is not the decline itself. The consensus has been an expectation that prices would head lower and there have been larger corrections, on a percentage basis, in the past few years, says Armstrong. The concern is about the rapidity with which it has occurred and the absence of any apparent support level.

That it was a triple-digit inventory build was by itself not unprecedented. There was a build of 105 billion cubic feet as recently as late May. Typically, such large injections occur during the shoulder months when demand is weakest.

What spooked the market was a much larger-than-expected build thrown on top of already bearish sentiment. Consensus called for an 88 billion cubic feet build with estimates ranging from 70 to 97 billion cubic feet. Clearly, something was missed. The EIA stated that there was nothing unusual at its end.

There are a number of possible explanations, says Armstrong. Consumption may have been dampened by the combination of relatively benign temperatures and less demand over the July 4th weekend. Also, extra supply may have been added to the market due to the timing of LNG shipments and the price difference between the spot and front month gas contract, which may have encouraged storage operators to buy gas on the spot market and then sell forward. This is possible since the volume of gas in pipelines is not counted as storage and can fluctuate.

Next week’s inventory report will be critical in determining whether this week’s build was an anomaly or an emphatic stamp on the end of this year’s bull run in energy. Calyon expects stocks to show some life in the near term due to short covering and a heat wave rolling through the midwest and northeast. However, stocks will need to see gas prices stabilize for an extended period before undertaking a more fundamental rally.

Mars could have supported prmitive forms of life some 4 billion years ago, when much of the planet’s surface was like a warm, soppy carpet, say an international team of three dozen scientists.  

The scientists’ findings, which appear in today’s edition of the British journal, Nature, are based on mineralogy data collected by the Reconnaissance Orbiter, a U.S. spacecraft that has circled the red planet since 2006.

The Reconnaissance Orbiter found aqueous minerals bonded to iron, magnesium and aluminum on the sides of canyon walls and rocky soils, which had come to the surface after impacts of meteors and comets. The data suggests the planet was soaked in water for several miles below the surface.

“It was like a saturated crust, that is what created the mineralogy,” says John Mustard, a Brown University planetary geologist who led the study.

In late May, NASA’s Phoenix lander began searching for carbon-based compounds, the chemical building blocks for life that could be lodged in the icy soil.

Hmmmm. Warm atmosphere, carbon compounds, primitive forms of life falling to the bottom of deep water? E&Ps may want to hotfoot it to their favorite private capital providers before Chesapeake Energy Corp. drives Mars lease prices to $30,000 per acre.

The Securities and Exchange Commission (SEC) plans to institute a new rule to limit the ability of traders to bet on a drop in shares of brokerage firms Freddie Mac and Fannie Mae to reduce stock manipulation.

The order, to be in effect for 30 days, will stem a practice called “naked short selling,” in which traders avoid financial costs of borrowing shares while betting they’ll fall.

Short sellers borrow shares from brokers or institutional investors and sell them, hoping to buy them back later at a lower price and profit from the difference.

SEC Chairman Christopher Cox told the Senate Banking Committee that his agency will require traders to hold shares of the two mortgage buyers and the brokerages before they execute a short sale. Cox also said the SEC will draft rules to limit the practice across the entire market.

The SEC is investigating whether such trading abuses may have contributed to the fall of Bear Stearns Cos. in March and the recent 80% drop in market value Lehman Brothers Holdings.

Today, the U.S. Labor Department reported the rising price of gasoline and food pushed inflation up by 1.8% in June. Inflation has risen during the past year at the fastest pace in more than 25 years.

Over the past 12 months, wholesale prices are up 9.2%, the largest year-over-year surge since June 1981.

My freinds and family who are not in the oil business ask when gasoline prices will go back down, and what to do to cope with the current cost.

To the first, not anytime soon. To the second, this may be a good opportunity to cancel the TV cable bill. In some cases, the $50 to $99 savings per month will more than make up the incremental difference of gasoline. Yes, the tv soon won’t work without cable. Well, one can always signup again later if the withdrawl pains are too strong. But think of the three or four month’s savings in the meantime.

What to do instead of watching tv? Perhaps a visit to the local library is in order. It’s free, and the special events can be very entertaining.  

Don’t know wht to read? Try Peter Benchley’s ”Girl of the Sea of Cortez,” or anything by Lee Child.  For the funny side, try Dave Barry’s “Big Trouble.”

One can also find local newspapers, magazines, audio and video tapes, and more. It is air-conditioned, so the more time spent in the library, the more AC-usage can be reduced at home.

I find most public libraries are sadly underused. Visiting a local library, hopefully within walking distance, is worth a try, in my book.

Peak oil? That is so last year. Today, we are in the Valley of De-Spare. As in, no more spare capacity.

Recent estimates by the U.S. Department of Energy’s Energy Information Administration forecast 2008 global oil production to be 86.48 million barrels per day, and consumption to be 86.40 million. Cutting it pretty close.

For 2009, the agency estimates production at 87.72 million barrels per day, with consumption at 87.76 million. Uh oh.

“The oil market remains tight, evidenced by rising prices, low surplus production capacity, and the concern that global supply growth may not keep pace with demand growth over the near term,” according to the agency.

Meanwhile, even as Saudi “plans” to raise production from 9.4 million barrels per day in June to 9.7 million in July, (a 27-year high), such talk has not resulted in an easing of prices.  Also, recent supply losses in Nigeria and heightened tensions between Iran and Israel add further concerns.  

Yea, though I walk through the Valley of De-Spare, I will fear no empty fuel tank. I have my trusty bike. 

I am a big fan of Houston Mayor Bill White. I think he should be voted King-For-Life of Houston.

However, the one thing he has not moved on is a Walk Houston ad campaign, to educate motorists to right-of-ways of pedestrians, and to encourage more pedestrian and bike traffic. Let’s follow the example of New York.

The mayor there will close two lanes to cars on Broadway in midtown to make way for a bike lane and a pedestrian walkway with cafe tables. Sounds nice, doesn’t it?

The esplanade, called Broadway Boulevard, will run from 42nd Street eight blocks south to Herald Square. The project will reduce traffic and pollution by encouraging bike riding and other alternatives to cars. Planters filled with flowers will separate the pedestrian areas from car traffic.

Our Houston sidewalks are much too narrow. A tv and newspaper ad campaign on the benefits of walking (say $10 million) and one lane of traffic losed on Westheimer, from Highway 6 to the 610 Loop, (say another $5 million for paint) would be a great start.

Yes, yes, it would slightly squeeze traffic on the chosen side, but, so? We don’t really need all those lanes on Westheimer, do we?

This could be a start to reduce car traffic and pollution, encourage biking and walking, reduce traffic and pollution, and bikers and pedestrians will be fitter.

What harm could it do?